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Retiree Benefits Take Another Hit

GM's Plan to End Medical Coverage For Many 65 and Over
Signals a New Era; Pensions to Increase by $300 a Month

By

Vanessa Fuhrmans and

Theo Francis

Updated July 16, 2008 12:01 a.m. ET

General Motors Corp.'s
move to eliminate retiree health benefits for salaried workers is a sobering signal to the rest of the U.S. work force: Even those who are in or near retirement shouldn't count on keeping the company coverage they have built up.

Tough Medicine

GM's move to cut retiree health benefits has implications for workers in other industries:

As of now, all nonunion workers -- even those who've earned full retiree benefits -- should understand that those benefits can be eliminated, either before or during their retirement.

Workers planning to retire early might consider working at least part-time to keep active employee health coverage until they're eligible for Medicare at age 65.

Since the early 1990s, employers eager to get out from under the increasing burden of covering their retirees' health care have been whittling away at those benefits. At some companies, new or younger workers have been excluded from retiree health benefits. Older workers and existing retirees often got to keep the benefits, but had to pay a larger share of the overall costs.

But GM's announcement Tuesday that it would cease medical coverage for its salaried retirees age 65 and above signals that a new era of ever-shrinking benefits has arrived. Beginning in January, even former employees who are already in retirement will lose their benefits, which most of the company's retirees use to supplement gaps in their traditional Medicare coverage. The auto maker will boost monthly pension payouts to help offset the cuts. The company's unionized workers aren't affected by the cut to retiree health benefits.

GM isn't the first company to do this, but its heft and influence could help usher in further cutbacks at other companies.

"Usually they did not do anything as draconian as this," says Karen Ferguson, director of the Pension Rights Center, a retiree advocacy group in Washington. "Usually they don't cancel the health insurance -- they'll increase the premium, they'll increase the deductibles."

At this point, employees and retirees "have to feel lucky if they still have retiree [health-care] benefits, and have to start planning for when they won't," says Rick McGill, head of retiree medical consulting for employee-benefits firm Hewitt Associates. He says such benefits are "a dying breed."

Retirement-benefit experts have for some time been recommending that all workers -- even those close to retiring and who've "earned" full retiree benefits -- should assume that those benefits will likely be eliminated, either before or during their retirement, and start planning and saving for it.

Many people planning to retire early should consider working at least part-time to keep active employee health coverage until they're eligible for Medicare at age 65, says Mr. McGill. That's because between 20% and 40% of people between 55 and 64 are either denied individual health coverage or forced to pay much higher premiums than the general population. Those 65 and older can save a lot by working a few years longer, he says. Even with Medicare, a 65-year-old couple's out-of-pocket health-care costs could reach $225,000 in their remaining years, according to Fidelity Investments.

GM, battered by slumping U.S. vehicle sales, Tuesday announced a series of moves aimed at raising $15 billion in liquidity by 2009. The auto maker also said it will suspend the dividend it pays to shareholders and cut its production of pickup trucks, among other measures.

In total, GM spent $4.75 billion last year on all its U.S. retirees' health benefits, including hourly workers and those under age 65. It says those retirees or surviving spouses who are affected will get a $300 a month increase in their pensions to help offset some of the costs of relying solely on Medicare, which has less-generous coverage than many private-sector plans. It also is hiring an outside firm to advise retirees on choosing Medicare drug plans, supplemental insurance or private Medicare plans.

Richard Schwaller, a 79-year-old retired GM regional service manager in Northville, Mich., says he supports GM's move, particularly if his pension rises by $300 a month to make up for the lost health benefits. But he says for some of his fellow retirees, in poor health, getting individual health insurance could prove costly.

"It sounds pretty good, but none of us has ever tried to shop for supplemental insurance," Mr. Schwaller says. "If you've got some serious health problems, I think that's going to make a big difference."

The affected salaried GM retirees join a growing number of active or retired workers who lack such benefits. Overall, about one worker in five had access to employer-sponsored retiree health benefits in 2003, down from one in three in 1997, according to the Urban Institute, a research institute in Washington.

Larger employers are much more likely to offer the benefit than smaller ones: About half of Fortune 100 companies offer it, and about a third of companies with more than 200 employees do, a number that has held roughly steady for more than a decade, according to separate tallies from Hewitt and the Kaiser Family Foundation.

Unlike just about every other kind of compensation, such as salary or pensions, retiree health benefits can be taken away even after workers have built them up. Indeed, unless a union contract prevents it, companies typically have a free hand to reduce or eliminate retiree health benefits for both active employees and retirees.

"Employers can pull the rug out from under their older workers and their retirees at any point -- there's no guarantee these benefits will continue," says Richard Johnson, a retirement researcher at the Urban Institute.

In recent years, many companies have done just that. Some have eliminated retiree health benefits entirely, while others -- including International Business Machines Corp., Delta Air Lines and Coca-Cola Enterprises -- have capped the amount the company will pay in premiums, leaving retirees to shoulder the impact of rising health-care costs.

Last year
Ford Motor Co.
also eliminated health benefits for Medicare-eligible salaried retirees and replaced it with an annual $1,800 stipend that may be used for Medicare and other health-care costs.

Critics, including the older people's lobbying group AARP, have said it is age discrimination to cut benefits just for those over 65, a position that received support from the federal Third Circuit Court of Appeals.

But other federal courts have backed employers, and in December, the Equal Employment Opportunity Commission did as well, after business organizations said companies might instead eliminate all retiree-health benefits, not just those for older workers.